Wal-Mart needs to grow overseas, and China's the big prize

In the U.S., Wal-Mart conquered the marketplace by offering "everyday low prices" to penny-pinching, bulk-buying customers, but Chinese shoppers have good reason to look for quality first, bargains second after scandals involving tainted and mislabeled food.

Zhong eventually tossed a couple of fish into a plastic bag — a small victory in this massive retailer's struggle to build an international empire.

Wal-Mart can't count on much sales growth from its U.S. business — it's facing challenges at home with intense competition from online leader Amazon.com and dollar stores, which offer low prices and convenience — so the retailer is depending more on its operations overseas.

Right now, it represents just 3 percent of Wal-Mart's global sales of $478.6 billion, according to estimates from IBISWorld, a research firm.

[...] the company has just over 400 stores in China, compared with more than 5,000 in the U.S. But the Chinese grocery market, already the world's largest at $1.1 trillion a year, is expected to grow to nearly $1.5 trillion in just the next four years, says IGD, a global consumer products research firm.

If Wal-Mart can get them in the door to buy food regularly, perhaps they will visit more frequently for items like pajamas and coffee makers — and eventually become loyal online customers, too.

In particular, global players like Wal-Mart have found that food retailing doesn't cross borders easily because it's a largely local business.

After struggling on its own in China, Britain's Tesco PLC decided two years ago to team up with China Resources Enterprise, a state-owned company.

Overseas, Wal-Mart lacks the scale to squeeze local suppliers on price as it does in the U.S. It also faces nimble competitors who are entrenched in foreign markets.

In Chile, it launched a corporate culture campaign and worked closely with suppliers to coax them into its way of doing business.

Wal-Mart also has come to realize that it can thrive without being the biggest player in every market, says Bryan Roberts, global insights director at TCC Global, a London-based marketing consultancy for grocery retailers.

At a store in Shenzhen, shoppers sniff bins of rice or use tongs or their hands to examine the piles of local sausage, whole chickens and pigs' feet.

In the massive, unruly Chinese market, some competitors have cut corners, mislabeling products or even selling tainted foods.

In particular, Wal-Mart had a difficult time promoting "everyday low prices" — promising the lowest prices on a basket of goods every time consumers shop.

Early on, Wal-Mart undermined its own claims for consistently low prices by running lots of short-term promotional gimmicks.

Two years later, it trotted out "Worry Free" — a message that employs the Chinese characters for "save, heart, price," implying quality and reassuring shoppers who worry that deals will expire before they get to the store.

In one particularly embarrassing episode, Wal-Mart had to recall donkey meat — a delicacy in China — after DNA testing showed it contained traces of fox meat.

The misstep came at a time when Chinese consumers were especially wary, because tainted baby formula had sickened hundreds of thousands of infants.

[...] the top 10 grocery retailers in China account for just 18.5 percent of the market, says Euromonitor International, a global market research firm.

[...] by eliminating the go-betweens, Wal-Mart could negotiate directly with suppliers and knock down costs — often by 10 percent to 12 percent, says Lesley Smith, senior vice president of the supply chain at Wal-Mart China and the woman behind the move.

[...] it's using Wal-Mart's national distribution network, which it says is resulting in fresher quality of goods at the store, higher sales and lower costs.

"At first, we had concerns, especially when the raw material costs had some ups and downs," says Cofco general manager Liu Hongwei says.

[...] Wal-Mart stocks Cofco products in the busiest parts of the stores and markets them under the "worry free" slogan.

[...] in the United Kingdom, Wal-Mart's Asda and traditional British supermarkets like Tesco and Sainsbury's are all being undercut by the rapidly expanding Aldi and Lidl chains.

In response, Asda is stepping up sustained price cuts and joined the European Marketing Distribution, which pools the buying power of 250 supermarket chains.

After investing in a Taiwanese-owned retail chain in 2007, Wal-Mart became China's biggest super-sized store chain and expanded its lead for over the next two years.

The local players can sometimes undercut Wal-Mart prices because they have closer ties to local suppliers and can negotiate better deals, says Kantar's Yu in Shanghai.

[...] it's blending its online services with its own stores and adding hubs in key cities to deliver goods to shoppers' homes.